The 8th Circuit Bankruptcy Appellate Court (BAP) has issued a new opinion baring excessive attorney fees involved in the use of bifurcated fee arrangements in Chapter 7 cases. See In re Allen, No 20-6023.

The United States Trustee, the agency that polices bankruptcy cases, objected tot he excessive attorney fees charged by William Riding in two chapter 7 cases filed in Missouri.

The attorney offered his clients two payment arrangements:

  • $1,500 for a traditional chapter 7 case where all fees are paid before the case is filed.
  • $2,000 fee payable in 12 monthly installments after the case was filed.

Both debtors chose second option to pay fees after the case was filed.

BANKRUPTCY LOANS: FRESH START FUNDING LLC.

In both cases the attorney used a company called Fresh Start Funding LLC to finance the case. Under the Fresh Start program the attorney was paid $1,500 for each case and he sold his unpaid receivable to Fresh Start to collect from the debtor in monthly payments.  Fresh Start would earn $500 for financing each case over 12 months.

Essentially, the debtor is taking out a $1,500 loan with an effective interest rate of 57%.

REASONABLENES OF ATTORNEY FEES

The bankruptcy court found that both chapter 7 cases were relatively simple and routine. No complex issues were involved and both debtors received a discharge of their debts.

Since the attorney performed the exact same duties in these bifurcated fee arrangement cases as are performed in a traditional pay-upfront case, the court deemed the extra $500 charge excessive. The Bankruptcy Appellate Panel agreed and denied the extra $500 finance charge but allowed the attorney to be paid the standard $1,500 fee.

THE GLARING FRAUD NOT ADDRESSED BY THE COURT: THE AUTOMATIC STAY VIOLATION

What completely amazes me about this opinion is why the court did not address the obvious fraud this fee arrangement involved:

On May 21, 2020, Mr. Ridings filed a chapter 7 petition and creditor matrix on behalf of Mr. Allen. The schedules, statement of financial affairs, and disclosure of attorney’s fees were filed forty-four minutes later. Mr. Allen received his discharge September 23, 2020.

Forty-four minutes later!!  The Schedules, Statement of Financial Affairs, and the Means Test were filed forty-four minutes later??

What this means is that all of these forms were actually prepared BEFORE the case was filed. This fee arrangement in the Allen case was clearly a fraud.

The entire concept of a bifurcated fee arrangement is that this work is prepared  AFTER the case is filed. That is why attorneys, in theory, are allowed to be paid after the bankruptcy is filed.  Attorneys are allowed to collect post-petition payments because the bulk of the legal work is supposedly performed after the case is filed. But in this case ALL the work was obviously prepared before the case is filed since it was filed only 44 minutes later.

Why should this attorney be allowed to collect a dime for services that were clearly prepared pre-petition?

Why did the 8th BAP not discuss this obvious fraud and automatic stay violation? Why should this attorney be allowed to collect a dime for services that were clearly prepared pre-petition?  How is this not a violation of the bankruptcy stay that prohibits the collection of payments for services rendered pre-petition?

MESSAGE TO FRESH START FUNDING: YOU WILL NOT BE PAID, GO AWAY

The message to Fresh Start Funding and other bankruptcy fee lenders is clear: You will not be paid in the 8th Circuit (which includes Nebraska, Iowa, Missouri, South Dakota, North Dakota, Minnesota, Arkansas and Oklahoma bankruptcy courts.)

In these cases the debtor got what they needed–an affordable payment plan to file bankruptcy. The debtor’s attorney got paid $1,500 which is his standard fee. But Fresh Start Funding will not be allowed to collect the $500 financing fee.  In other words, get lost, you won’t be paid in the 8th Circuit.

A case is pending in the Nebraska bankruptcy court on this exact issue, and it is now abundantly clear how the Court will rule.

 

Image courtesy of Flickr and Rachel Kramer Bussel